The Reserve Bank board meets on Melbourne Cup day, and markets are betting it will lift the cash rate by a quarter of a point. Traders now put the odds at 82 per cent. If it happens, the cash rate reaches its highest level since 2008, and it lands on a housing market that is already falling.
The trigger was fresh ABS data showing underlying inflation at 3.5 per cent for September, above the bank’s 2 to 3 per cent target. Most commentary has focused on whether the RBA is right to move. The more useful question for borrowers is how a hike travels through household budgets and then into prices.
Why the hike is close to locked in
A survey of 34 economists and housing analysts found about three in four expect the increase on Tuesday. One industry economist argued the bank has little choice, because inflation is running above target. Another suggested the RBA’s patience is wearing thin and that it may now accept higher unemployment as the cost of getting inflation down.
That last point matters. A central bank willing to tolerate more job losses is a central bank that will keep rates higher for longer. For borrowers, the risk is not one hike, it is the possibility that relief is pushed further out.
From a cash rate move to your repayment
The mechanics are simple. Variable-rate lenders usually pass a rate rise through within days or weeks, so repayments on a variable loan climb almost at once. Fixed-rate borrowers are protected only until their term ends, then reprice at the new level.
The damage depends on the buffer a household has left. Many borrowers were assessed on serviceability tests that assumed rates would rise, so most should be able to absorb a quarter-point. The strain builds when several things stack up: higher repayments, higher living costs, and a smaller margin for error each time the cash rate moves again.
If you want the repayment arithmetic, our guide to the RBA, interest rates and repayments walks through it. We have also covered why borrowers end up carrying the inflation fight.
Where mortgage arrears stand now
The early signs of stress are visible but modest. A ratings agency reports that arrears among first-home buyers sit near 1 per cent, and the trend is upward. That is not a crisis number. It does tell you which group feels it first.
First-home buyers tend to carry high loan-to-value ratios and have had the least time to build equity or savings. They are also the most exposed if falling prices erode the small cushion they started with.
Key numbers
- Cash rate: heading to its highest since 2008 if the hike goes ahead
- Market odds of a rise: 82 per cent
- Underlying inflation: 3.5 per cent for September
- National home prices: down 5.5 per cent
- First-home buyer arrears: near 1 per cent and rising
The price channel: why falling values change the risk
A property economist noted that national prices are already down 5.5 per cent, matching the fall seen in 2018, which was the steepest this century. The same analyst warned the slump could become the worst since the 1980s.
Falling prices affect arrears in a way that rate rises alone do not. A borrower who cannot meet repayments can usually sell, repay the bank and walk away. That option narrows as values drop, because the sale price may no longer cover the loan. When selling is no longer a clean exit, arrears are more likely to harden into defaults.
This is the link between rates, prices and credit losses. For more on that squeeze, see our look at negative equity as another rate rise nears and the capital city price falls.
The recession feedback loop
The survey also captured a shift in mood. Some 35 per cent of respondents now regard a recession within six months as likely, up from 30 per cent a month earlier. Ten respondents, or 29 per cent, were undecided. One economist cautioned that additional hikes materially raise the odds of a downturn.
Here is the catch. Higher rates slow spending and hiring. Slower hiring raises unemployment. Unemployment is the single biggest driver of loans moving from stressed to defaulted, because a borrower who loses income cannot service even a modest repayment. A recession would therefore turn today’s small arrears figure into a very different story, which is why the sequence matters more than any single forecast. Our piece on what a hard landing means for property covers that path in more detail.
What to watch after Tuesday
The decision itself is largely priced in. What will tell you more is what comes next:
- The RBA’s wording. Any signal that more hikes are possible raises recession and arrears risk.
- Monthly price data. Further falls tighten the equity squeeze for recent buyers.
- Arrears reporting. Watch for the first-home buyer rate moving well above 1 per cent.
- Unemployment. This is the real hinge between a rough patch and a credit event.
Stress-test your loan before the hike
If you hold a variable loan, work out your repayment at a rate half a point to a full point higher than today, and check whether you can carry it comfortably. If you are a recent first-home buyer on a high loan-to-value ratio, a cash buffer is worth more than a lower rate you hope for. And if you are close to a fixed-rate expiry, talk to your lender or broker early rather than waiting for the reset letter.
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General info, not financial advice.
